Brown Forman Inc

Good morning. My name is Dorothy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brown-Forman First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Leanne Cunningham, Senior Vice President, Shareholder Relations Officer. Ma'am, you may begin.

Thank you, Dorothy, and good morning, everyone. I would like to thank each of you for joining us for Brown Forman's first quarter of fiscal 2020 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer, and Jane Moreau, Executive Vice President and Chief Financial Officer. This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward-looking statements. and the company undertakes no obligation to update any of these statements, whether due to new information, future events, or otherwise. This morning, we issued a press release containing our results for the first quarter of fiscal 2020, in addition to posting presentation materials that Lawson and Jane will walk you through momentarily. Both the release and the presentation can be found on our website under the section titled Investors, Events, and Presentations. In the press release, we have listed a number of risk factors that you should consider in conjunction with our forward-looking statement. Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciliation to the most directly comparable GAAP financial measures and the reason management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release and investor presentation. One quick item before I turn the call over to Lawson and Jane. In the interest of time and fairness, we ask that you limit your questions to one per analyst. You are welcome to rejoin the queue, and we will take your follow-up questions as time permits. With that, I'd like to turn the call over to Jane.

Thank you, Leanne, and good morning, everyone. Today, in our earnings release, we reaffirmed our full-year growth outlook for underlying net sales, operating income, and earnings per share as our first quarter performance was essentially in line with our expectations. What I'm going to do is walk you through our first quarter results to provide clarity to our performance, given the considerable noise that exists. After I finished my prepared remarks, I'm going to turn the call over to Lawson for some additional color and comments. So, before digging into our Q1 results, I thought it might be helpful to remind you how we break down our performance to better understand, first, the significant drivers of our results, and second, the trends that could affect our business. We have consistently isolated both the foreign exchange and distributor inventory shifts to provide an estimate of our underlying performance. When there are other factors that are significantly influencing our underlying performance, we have tried to provide visibility either qualitatively or, where possible, quantitatively. This quarter was particularly noisy with several factors influencing our underlying performance, most notably the noise introduced by the trade wars and the effects of the retaliatory tariffs, particularly from Europe. While we've discussed this subject for five consecutive quarters, the impact in this year's first quarter is significant and is affecting us in a couple of ways. First, the buy-in from prior year, which led to higher growth in the first quarter last year. And second, a reduction in margins, which is a result of either lower net pricing to certain markets where we sell to distributors or higher costs in markets where we import and distribute our products directly. Aside from tariffs, other factors can affect comparability, and in this quarter, consumer buying patterns across a number of markets are notable. With this as a backdrop, I will highlight these factors where appropriate to help cut through the noise. So now turning to our performance in the first quarter. Our first quarter net sales were essentially flat, in line with our expectations, given the tariff and timing issues I just noted. Recall last year's first quarter underlying net sales grew 9%, favorably impacted by tariff-related buy-ins and anticipation of price increases, particularly in several of our largest markets in Europe. We estimate this factor and price adjustments related to tariffs reduced our underlying net sales growth by approximately three points for the quarter. Additionally, we approximate timing-related buying patterns across a number of our international markets and our global travel retail channel negatively affected our underlying net sales growth by nearly two percentage points. Thus, after adjusting for these items, we believe underlying net sales grew in the mid-single digits which is in line with our long-term track record of performance. And looking at our business from a geographic perspective, I'd like to start with our developed international markets, where our performance was most significantly impacted by tariff-related costs and buy-ins. Our underlying net sales declined 3% in the aggregate for the markets there, compared to 16% underlying net sales growth in the first quarter of last year. We estimate tariffs had about a six percentage point drag on the overall top line performance in these markets combined in the quarter. Adjusting from the tariff effect and an estimated two percentage point reduction related to timing of certain customer purchases, we believe our developed international business grew underlying net sales approximately 5% in line with our historical performance in these markets. The UK and Germany markets were most significantly affected by the tariff-related buy-ins, and therefore, both reflected underlying net sales decline. We believe our consumer takeaway trends in both of these markets remain healthy. I thought I would pause for just a moment to mention that UK, our second largest market, is navigating through multiple changes this year, including, first, the uncertainty around Brexit, and second, the recently announced change in our route to consumer. We have mitigation actions in place for Brexit and are executing against our plan to minimize disruptions and to maintain our business momentum during this transition to our own distribution. France and Spain, both among our largest European businesses and where we have invested in our route to consumer models, delivered mid- and high single-digit underlying net sales growth, respectively. France's growth was fueled by the launch of Jack Dino's RTDs and sustained strong momentum behind Jack Dino's Tennessee Honey. Spain continues to benefit from the focus that has resulted from our route to consumer change, as growth was seen across nearly every brand in the portfolio. Moving on to our emerging markets, In the quarter, our emerging markets collectively grew underlying net sales 3% on top of last year's double-digit growth. We estimate the tariff-related buy-ins in last year's first quarter for a number of emerging markets, including Turkey and Poland, negatively affected growth by approximately 3 percentage points. Timing related to certain customer buying patterns further suppressed the growth of our emerging markets in the quarter. we expect our emerging markets underlying net sales to accelerate over the balance of the year and approximate the growth we've experienced over the last two fiscal years. And with that being said, in Mexico, our largest emerging market, underlying net sales grew 3%, a bit slower than recent trends, reflecting the difficult macroeconomic and political environment in that country. Though we often don't discuss brick markets as a unit, this quarter these markets collectively grew underlying net sales in the high single digits. To touch on each market briefly, Brazil continues to focus and execute a strategy as consumer demand expands for Jack Daniel's Tennessee Fire and Tennessee Whiskey. Russia's underlying net sales growth was fueled in part by strong consumer demand of Jack Daniel's Tennessee Whiskey as well as Finlandia. China and India's strong growth was led by what we believe are early days of introducing Jack Daniel's Tennessee whiskey to consumers in these markets where we believe represents significant long-term potential. Quarterly sales in our travel retail can be inconsistent, and this quarter was no exception. as underlying net sales declined as expected, cycling against the very strong 22% underlying net sales growth in the same quarter last year, which was influenced significantly by the timing of certain customer purchases. Looking ahead, we expect travel retail's underlying net sales growth rates to improve as the large timing effects move out. As a result, we expect full-year underlying net sales growth in the mid-single digits for the year. Now turning to the U.S., our largest market, representing a little less than half of our net sales, grew underlying net sales 4% for the quarter, representing an acceleration over the 3% underlying net sales growth delivered in fiscal 2019. We believe This positive momentum is reflective of the continued strong and sustained performance of both our super premium bourbons led by Woodford Reserve and our tequila portfolio led by Herradura, as well as improving trends for the Jack Daniels family of brands led by Jack Daniels Tennessee Whiskey. We believe our trends for Jack Daniels Tennessee Whiskey are just beginning to reflect the benefits. of our incremental broad reach media and digital investments we have made in the first quarter, and we intend to continue to make over the balance of the year, enabled in part by our significant reallocation within advertising and a year-over-year increase in activations and promotional activities. The improving trends in our U.S. business are also evident by the fact that we have closed the gap versus TDS, on a blended basis to less than a point over the past six months. Further, the latest three-month notions reflect that we are growing in line with the industry, which remains very healthy, growing mid-single digits. Now, looking at our business from a brand perspective, Jack Daniel's family of brands underlying net sales declined 1% globally as tariff-related costs and buy-ins for Jack Daniel's Tennessee Whiskey, largely in Europe, negatively affected our growth by 3 percentage points. These declines were partially offset by broad-based growth of Jack Daniel's RTDs, international gains for Tennessee Honey, sustained advances for Gentleman Jack, as well as the increasing volumes of Jack Daniel's Tennessee Whiskey in the United States. Our premium bourbon portfolio grew underlying net sales 16% for the quarter, led by over 20% consumer takeaway trends for Woodford Reserve in the U.S., the leader in the super premium bourbon category. Old Forrester delivers strong double-digit growth in underlying net sales, driven by the launch of our new innovation, Old Forrester Rye, which has been very well received by the trade and our consumers. as well as broad-based double-digit growth across the portfolio of expression. The brand's new home place and distillery, which opened last summer in Louisville, has also boosted the brand's growth with nearly 100,000 visitors since that time. Once again, our tequila portfolio showed strong, sustained momentum, growing underlying net sales at a double-digit rate, building on the double-digit growth in fiscal 2019. Arradura led the growth with underlying net sales up 22%, driven by higher prices and volumes in both Mexico and the United States. Alhematura shared in the double-digit underlying net sales growth, driven by higher volumes and prices in the United States. Its takeaway trends remain strong. Moving down our P&L, Gross margins were in line with our expectations, declining 330 basis points for the quarter, resulting in underlying gross profit drop of 5%. The margin decline was driven by two factors that we discussed during our year-end earnings call. First, the tariff-related cost, which accounted for roughly two-thirds of the decline, and second, higher input costs, primarily related to agave, as well as ongoing wood inflation. Underlying A&P was down for the quarter as our increased investment behind Jack Daniel's Tennessee Whiskey in the United States, primarily media related, was more than offset by the timing of investments on our tequilas and the rest of the Jack Daniel's family of brands. Underlying SG&A was down in the quarter driven by lower incentive compensation related expenses considered to be timing only. Turning now to the full-year outlook, as I said earlier, Q1 was essentially in line with our expectations, and thus we remain on track to deliver another year of solid results. Starting with our top-line growth expectations, we expect underlying net sales growth of 5% to 7% in fiscal 2020 and change from our earnings call in June. The key message is that we remain confident in the health of our business. While Q1 was noisy, it was expected. After considering these factors, we believe our top-line trends remain solid, going mid-single digits, and supporting our outlook. Our confidence is further supported by our brand consumer takeaway trends, which have improved in many of our major markets. Further, We expect our underlying net sales in the U.S. to continue to accelerate, reflecting our more recent blended value takeaway performance and sustained double-digit growth for our premium bourbon brands and tequilas. We also expect Jack Dean of Tennessee Whiskey to add to our improving trends throughout the years as we continue to invest in incremental advertising and promotional activities. In addition, We continue to expect the launch of Jack Skinner's Tennessee Apple in the United States, which is anticipated to begin shipping in September, with plans to be on the shelf in October, will provide incremental contribution to the year. We are encouraged by our trade partners' response and enthusiasm toward this innovation thus far. We still expect gross margins to be down around 200 basis points for the year. split between costs of sales impact related to tariffs and higher input costs. Now, I thought it might be helpful to remind you that we expect the cost of tariffs to continue to be a drag on our margin and bottom line through Q2. In Q3, we will begin to cycle these costs from last year. Regarding our operating costs in fiscal 2020, we are planning solid reinvestments behind our brands, with underlying advertising growth slightly lagging our rate of net sales growth. As a reminder, our planned advertising investment for the year includes a significant reallocation of certain investments from less efficient areas to broad-reach media, digital, and scalable consumer-facing activations, which we expect to drive an effective increase well above our actual increase in spend. We expect SG&A to grow modestly as we remain diligent and focused on efficiency and productivity, driving some leverage to operating income. So in summary, we reaffirmed our four-year outlook for underlying operating income growth of 3% to 5% in earnings per share of $1.75 to $1.85. We continue to believe we have a long runway of potential growth ahead and that our business remains quite attractive with high margins and industry-leading return on invested capital. In addition, we believe our long-term, highly engaged shareholders, led by the Brown family, allow us to endure volatile times, such as what we are currently experiencing with tariffs, and to continue to thoughtfully build our brands to endure volatility. for generations to come. We believe that regardless of the tariff-related drag that significantly affected our results last year and that we expect to continue this year, that Brown Forman remains healthy with a demonstrated track record of resilience over the last 149 years and with high anticipation of celebrating our 150th year, which is just a few short months away. And with that, let me turn the call over now to Lawson for his comments.